Commercial and industrial property risks and rewards

CommercialMonday 1 February 2016

As with all property investments, the smarter you invest, the better the return will be. A small office suite in an inner city suburb might be a better investment in the long run than a similar property 30 kilometres from the CBD.

Of course, there are rewards from commercial and industrial property investment, whether it’s office spaces or warehouses, but you need the right kind of advice when you decide to make your move. It also helps to have a switched on rental management service to take over the daily items like maintenance.

Commercial and industrial or residential – what are the returns?

According to CoreLogic RP data, the returns on commercial property rentals are higher than residential. Residential returns average 3.6% across Australia, while the commercial sector averages 8% with a 12% gross rental yield.

Commercial and industrial tenancies are also longer, since businesses don’t like to relocate more often than they have to. A typical residential tenancy may be for a year, while commercial or industrial leases average between three and ten years. This means the hassles of tenant turnover – advertising, choosing tenants, negotiating leases – come less often with an industrial or commercial lease.

RealCommercial.com.au provides these comparisons between residential, commercial and industrial property investment returns, following an initial purchase price of $500,000:

House – Rent = $20,000 (4%)

Unit – Rent = $25,000 (5%)

Retail – Rent = $35,000 (7%)

Office – Rent = $40,000 (8%)

Industrial – Rent = $50,000 (10%)

More tenants mean getting the right manager is crucial

Commercial property management is vital when you could have more than one tenant. This multiplies the work that you have to do as a property manager, which is why it is unusual for a commercial property to be managed by a non-professional.

Lease management and tenant advertising could be a full-time job, never mind arranging air-conditioning maintenance and repair, plumbers for misbehaving bathrooms, and other requests your tenants can make.

Successful property investment and economic growth

Growth in commercial and industrial property markets is linked to the economy. As the economy grows, the demand for goods and services increases, which means warehousing, retail and office space demand grows. Lower interest rates mean that growth will be strong, which means there is more chance of your investment paying off in the sorts of conditions that exist in the current Australian economy.
Look out for new infrastructure

Infrastructure is another big factor to consider in commercial and industrial property investment. A new motorway brings with it a channel down which goods and services will flow. Canny investors look out for these developments – such as the soon to be opened train line from Brisbane to the Redcliffe Peninsula, or Sydney’s M7 bypass – which create desirable zones for industry and commercial office complexes.

Finally, when you are looking at commercial and industrial properties for investment you should ask yourself three questions – ‘who are my target tenants?’, ‘what will they be looking for in an office/retail/industrial space’ and ‘is this location somewhere they would want to be?’ The answers to these questions can help steer you towards a sound property investment.